Oil Prices Aren't Up - The Dollar's Value is Down

As oil approaches $100 a barrel, a great number of explanations emerge that focus on oil. Demand for oil worldwide is increasing, led by growth in India and China. Oil supplies are reaching a limit and new supplies are becoming harder to reach. Instability in the Middle East has resulted in an additional risk premium. Explanations like these that focus on oil may miss the most important variable - the falling value of the dollar.

Since early '06, oil prices have gone up from the about $60 a barrel to nearly $100. By contrast, oil priced by euros has gone up from about 50 euro to over 60 euro. Oil prices have increased by about 66% in the US, but only about 20% in Europe.

The good news is that the country consuming the most oil per capita is going to be forced to become creative in its use of oil. The bad news is that just as our goods are becoming more competitive, courtesy of a devalued dollar, our input costs are going up. Unless we can find ways to produce as much with less oil, becoming more productive, or energy-efficient, this opportunity to lower our trade deficit by exporting more could be lost.

The reasons for launching a national energy policy initiative that would lessen our dependence on oil are stacking up. At some point, even people as unimaginative and cautious as politicians will have to wake up to this fact and act.